Already an attractive category for investors, B2B marketplaces are well positioned to capitalise on the re-emergence of ESG and sustainability concerns as the Covid-19 pandemic starts to subside, writes Alexander Chikunov, Partner at Sova VC.
Environmental, social and governance (ESG) and sustainability concerns have been on the business agenda for some time, but shot up the list of priorities in 2020. Last year, when the global restrictions to stop the spread of the coronavirus were at their height, carbon emissions fell by 7%. It was the largest drop in fossil-fuel emissions ever recorded.
Even if we could snap our fingers and somehow wish away the crisis of the past year, all of the risks presented by the climate emergency would still exist: 2020 brought them into sharp focus. The World Economic Forum’s Global Risks Report 2020, published before the pandemic, listed the top five most likely risks as environmental, while the top four of five risks in terms of impact were both social and environmental in nature.
This comes against a backdrop where investors have been demanding more from companies’ ESG efforts. In January 2020, State Street President and CEO Cyrus Taraporevala said: “We believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance – a matter of value, not values.”
In other words, ESG must be about more than PR or corporate social responsibility. It’s fundamentally linked to the future health and success of business. It’s sustainability in the widest sense of the word: sustainability of the planet and also of the businesses that are showing leadership in operating ethically and responsibly.
Demand for B2B emissions trading
These twin forces of investor demand and a literal burning platform – the climate emergency – are creating demand for businesses to be able to report on their ESG efforts, track them, and publish them. This is where B2B marketplaces come in.
Cross-industry platforms for trading carbon emissions make sense. Right now, carbon capture and storage is expensive, with costs per tonne ranging between $40-57. Governments are under pressure to limit emissions either through quotes that are sold or free in the form of subsidies, although the share of free quotes is falling.
Estimates vary for the size of the global carbon offset market, ranging between $40 billion and $120 billion (2018). Yet as recently as 2018, the share of OTC voluntary emissions reduction trades in the EU only stood at around $300 million. But as environmental regulations tighten, the carbon credits market is expected to boom, with different sources suggesting growth of 50% to 3x p.a.
At the moment, governments run a few centralised systems for trading carbon credits, including the EU Emissions Trading System (EU ETS), but these are limited to a relatively small number of large organisations that use them to trade with governments rather than with each other.
The marketplace difference
B2B marketplaces mostly play the same role as governments but with a few important differences. They enable carbon trading more simply and effectively, they invite many more players, they are closer to the ground, and are more flexible in their approach.
They connect industries that overproduce carbon with groups that capture carbon, giving the latter access to brand-new revenue streams. Marketplaces help to co-create different types of carbon credits, such as reforestation projects.
With better models and broader reach, I believe commercial marketplaces will overtake government platforms before long. They bring transparency by helping to address longstanding issues with carbon offsets like quantifiability and verification.
Poised for growth
This area is still maturing, with many platforms and no obvious winners yet. B2B marketplaces can play a much bigger role than they do today. As a category, they are forecasted to generate US$3.6 trillion in global sales by 2024, according to iBe, a London-based payments research and consulting firm. All of this should be music to investors’ ears.
Some of the interesting players in this space include Puro.earth, a marketplace based in Finland which spun out of Fortum, a leading clean energy company in the Nordics. Climatetrade is a Spanish enterprise which has successfully raised funding from Borderless Capital, Hangar 51 and PALcaptial to provide a blockchain-enabled carbon offsetting platform. Nori is a US-based player and series A recipient which lets you buy carbon removed from the atmosphere, connecting farmers with buyers who want to reduce their own carbon footprints. (As an interesting side note, trades on Nori’s marketplace are enabled by crypto-tokens.)
Pachama is a marketplace for reforestation projects for enterprises to offset carbon emissions, using AI to make its calculations. It’s raised $9m Series A since 2018, and investors include names like Amazon, Aglaé Ventures, Airbnb, Breakthrough Energy and Serena Ventures.
Looking more broadly at sustainability, there are lots of unsolved problems today beyond CO2 emissions, that marketplaces are well placed to address. For example, the scrap metal market is dominated by players like Sims Metal and TSR, but new digital marketplaces are emerging like Secontrade and Remetal. In excess steel, marketplaces like German Schrott24 have recently raised $3m+ from Statkraft Ventures, FJ Labs and others.
Food waste marketplaces like Oddbox and Olio in the UK are already attracting investors. Marketplaces for clothing and textile reuse are also emerging, such as Resortecs of Belgium, Sweden’s Vividye and Circular.Fashion, a German site that connects material suppliers and fashion brands.
We are positive about B2B marketplaces for ESG and sustainability, because they address real problems, and they deliver on the green agenda that governments will push in the years ahead. With interesting players emerging, these platforms are well placed to grow, offering potential returns for investors.
